25 July 2018

What Fresh Hell Is This? More on the Trump Adminstration's Trade Policy

As a political economist, my morning trip through the newspaper (I prefer the Wall Street Journal, by the way) seems of late to elicit almost daily outrage. Wednesday brought the headline “Trump Offers Trade Aid to Farmers” (Vivian Salama and Jacob Bunge, 25 July 2018). The Trump Administration’s escalating “trade war” with a host of nations around the world is reducing American agricultural exports, and particularly from states whose electors voted for Trump. Agriculture Secretary Sonny Perdue spoke Tuesday of providing $12 billion in emergency bailout funds that would not require separate Congressional authorization or appropriation—and which would in turn provide yet another example of the excess of American presidential power. After all, what can be less sensible than a tariff followed by a subsidy to make up for the disaster of the tariff, all imposed without parliamentary debate? Such ill-conceived policy can lead to a pernicious cycle, and in the long run, we can only hope that the tomfoolery will not affect our security as well.

Let’s start with some essential theory. For those still under the spell of the latest round of voodoo, I recommend “A Brief Introduction to Trade Economics,” a most excellent essay by Princeton University’s Alan Blinder, from earlier this month in the WSJ. Demonstrating that tariffs harm one’s own people worse than they harm those abroad is a classic and elementary exercise. Moreover, as any student should know, the Trump Administration’s continuance of the Obama Administration’s spendthrift ways was only likely to increase trade imbalances in the future. If you’re not a current student of economics, take it from Maurice Obstfeld, director of research for the International Monetary Fund, whose 2018 External Sector Reportwas released just this week. The issue isn’t really European tariffs on American automobiles, which harm Europeans more than Americans. Rather, the far bigger problem is America’s grotesque fiscal imbalance. The Congress and the administration could reduce their chronic deficits, but that would fail to reward those whom Mitt Romney once called The Forty-Eight Percent with continuing and continually unaffordable income transfers.

Perhaps Mr. Trump finds these truths inconvenient, and just fancies the art of a grand deal. But if so, then as that article in the WSJcontinued, Senator Mike Rounds of South Dakota wants to know precisely “what’s the strategy? What’s the endgame here? At what point do we start seeing things move out of the chaotic state they are in now, and to where we actually see new trade agreements?” Perhaps there really is one, and it’s about to find success, such as that it. In a note to clients this evening, Charles Gabriel of Capital Alpha Partners wondered whether Trump’s machinations are actually “all going according to plan.” As CNBC reported, Trump was today claiming at the White House that he and European Commission President Jean-Claude Juncker had agreed "to work together towards zero tariffs, zero non-tariff barriers and zero subsidies for the non-auto industrial goods.”

Really? On airliners too? For all of us who have had enough, as I once wrote, of “the mutually assured destruction of the Airbus-Boeing dispute,” that seems too good to be true. Perhaps instead, though, the process really is the product here. Given the White House’s routine disdain for truth, is it too much to wonder whether the tariffs are actually about bringing about a zero-zero world? Perhaps Trump merely wishes to divert protectionist rents to relatively unproductive Americans, many of whom switched their traditional party allegiance in the 2016 election. How that is not reasonably called the corruption of petty collectivism is beyond me.

Fairly, Trumpian protectionism has not yet proved economically disastrous, but the initial signs are bad, as theory would hold. The tariffs have clearly affected the performance of large-cap equities of late, and rather disproportionately in sectors reliant on global trade. As a recent report from UBS notes, the substitutability of some products has buffered losses, but even that effect is distorting the efficient patterns of commerce. Thus the politics and the economics, which have been well reported elsewhere. So just how does this affect our ability to keep the world safe from more serious tyranny?

Consider first the short-term problem of this fresh round of insults. Simply outrageous was Commerce Secretary Wilbur Ross’s assertion that duties on Canadian metals were matters of national security. As I told the Washington Postin June, “I can’t imagine the circumstances in which a Canadian federal government would try to choke off aluminum supplies to the U.S.” Prime Minister Trudeau was even less amused, calling this nonsense an affront to the memory of Canadians who had died alongside their American comrades in battle. Recall, then, how Aaron Mehta of Defense Newsreportedtwo weeks ago that White House advisor Peter Navarro would be staying away from this month’s Farnborough Air Show due to scheduling conflicts. Uh-huh. Perhaps the real reason was that no one could take seriously a sales pitch from him. For as Paul McLeary might have alludedfor Breaking Defense, nothing says “buy Eurofighters” like special taxes on your allies’ exports.

Consider then the long-term implications of the administration’s beggar-thy-neighbor policies. If this Smoot-Hawley redux is allowed to spiral into economic perdition, the United States would be hurt most of all. For even with 24 percent of gross world product, none can expect 4.3 percent of the world’s population to dictate special terms to the planet. Enforcing unilateral banking sanctions on the Iranians is one thing, but the viability of even that stratagem has an expiration date. As the rest of the world catches up economically, the solidarity of alliances will gain in importance for America's security. But if instead, the rest of the world is left to trade amongst itself, the US might not become so disconnected as the old Soviet Union, but it will be even further diminished in relative influence.

And if policies as these persist, America’s relative economic power will decline faster. This is problematic, for even if the rents of governmental fiat are indeed the object, wealth is power. As Michael Beckley argued in his prize-winning article “Economic Development and Military Effectiveness,” success in war may largely follow success in business. Picking fights with one’s friends brings neither. Beckley’s forthcoming book, Unrivaled: Why America Will Remain the World's Sole Superpower (Cornell University Press, August 2018), argues that “the United States has unique advantages over other nations that, if used wisely, will allow it to remain the world's only superpower throughout this century.” If used wiselyseems to key here. Whatever the strategy, it certainly cannot turn on a costly bandage of subsidies applied to the self-inflicted wound of tariffs.

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What I Do

James Hasik is a senior fellow at the Brent Scowcroft Center on International Security at the Atlantic Council. Since September 2001, he has been studying global security challenges and the economic enterprises that provide the tools to address them.

In the Press

On Section 232 silliness

And as Trudeau repeats whenever interviewed on American television, Canadian aluminum still ends up in U.S. fighter aircraft and its steel is used in American tanks. James Hasik, senior fellow at the Brent Scowcroft Center on International Security at the Atlantic Council, said that nobody he knows in the national security community believes that invocation of the Section 232 national security clause has any substance. “I can’t imagine the circumstances in which a Canadian federal government would try to choke off aluminum supplies to the U.S.,” Hasik said. Trump to See National Security Threat in Canada Firsthand, in the Washington Post, 7 June 2018.

On what to watch

James Hasik, a professor at the National Defense University, said he would be keeping a close eye on how the autonomous Sea Hunter vehicle does during ongoing testing. DARPA recently transferred the Sea Hunter, designed to travel thousands of miles over open seas, for months at a time, without a crew member on board, over to the Navy for continued testing. “The economics of that concept are so compelling,” Hasik said. If the concept proves out, it could have “some profound applications for fleet structure, some profound applications for warfighting.” What to expect from AI, space and other tech over the next 18 months, in Defense News, 10 May 2018.

On market entry, in the long run

Oshkosh “might wind up with a run of many decades as having been the favorite for military trucks in North America. But it doesn’t mean that they are guaranteed to keep it, because it’s an industry in which entry into the military market segment is not as challenging as it is in other segments”.
Army Moves Forward with New Medium Truck Acquisition in National Defense, April 2018

More on the brilliance of the feasible

“The Army’s failure to effect greater progress [in armored vehicle programs] may have seemed tragic, but retrospectively, it was almost fated: programs like FCS and GCV were doomed before they were begun. For had the future been more readily foreseen from within the department, technological trajectories like those would have called long ago for more modest investments. The Army’s leadership is just recognizing the art of the possible, and investing accordingly.”
Army Accelerates Armor: Stryker, Trophy, MPF Race To Field in Breaking Defense, 16 October 2017

On the brilliance of the feasible

“There’s actually no reason to dislike the program today. I haven’t noticed yet any meaningful cost overruns on JLTV. I think with fixed-price contracts — as they have — you’re not going to get them. From what I can tell it is a great deal. It does basically exactly what it’s supposed to do, and at a pretty reasonable price.”
JLTV Program Could Serve as Acquisition Model, in National Defense magazine, 9 October 2017

On staying out of the way

“In 2014, Russian signals intelligence drones and Russian artillery worked quickly and efficiently to target Ukrainian troops by triangulating their radio emissions. And as the Ukrainians learned, emitting in any pattern that says headquarters will attract lots of cannon and rocket fire.”
Army seeks fixes to vulnerable satellite communications,
in Space News, 28 September 2017